Is the Default Investment in Your 401(k) Plan Qualified? By: Michelle Steinbronn, CPA Date: 9/24/09 When a participant enters your bank’s 401(k) plan and doesn’t allocate contributions among the plan’s investments (or in the case of automatic enrollment), are you, as the plan sponsor, protected from potential litigation? And are you providing an investment vehicle that will best meet the needs of those in your company that do not direct their own investments but rather rely on the default investment?  On October 24, 2007 the Department of Labor issued a final regulation regarding default investments of participant-directed 401(k) plans to address this issue. The prior regulation required participant-directed investment plans to provide quality investment choices to plan participants. The latest regulation goes a step further by defining four types of investments for the investing of participant funds where the participants are given the opportunity to direct their investments but have not done so.  The Regulation refers to these investments as Qualified Default Investment Alternatives (QDIAs).  A QDIA per the regulation is not a particular investment product, but rather one that provides mechanisms that will best meet the participant’s long term retirement goals.  The four types of QDIAs, as follows, must be managed by an investment manager, plan trustee, plan sponsor, registered Investment Company or by an employee-based fiduciary committee:    A product with a mix of investments that takes the individual’s age or retirement date into account (e.g. a life-cycle or targeted retirement date fund). An investment service that allocates contributions among existing plan options to provide an asset mix that takes the individual’s age or retirement date into account (e.g. a professionally managed account). A product with a mix of investments that takes the characteristics of the group of employees as a whole into account (e.g. a balanced fund). A capital preservation product for the first 120 days of participation only. It is important to note that a QDIA generally cannot invest in employer securities.  The ultimate goal of QDIAs is to increase participant retirement savings while protecting plans from litigation stemming from poor investment returns. It is expected that the new regulation will result in somewhere between $70 billion and $134 billion in additional retirement savings by 2034. For more information about QDIAs and the other requirements included in the Regulation, please read the fact sheet developed by the U.S. Department of Labor at http://www.dol.gov/ebsa/newsroom/fsQDIA.html.